Earnings Management in an Overlapping Generations Model

The article focuses on the internal demand for earnings management. It states that demand for earnings management comes from two sources: internal, meant to lessen expected costs of convincing management to adopt shareholders' preferred actions, and external, based on shareholders' interest in influencing potential investors' perception of their corporation's value. It comments on the implications of stock price reactions to announcements concerning corporate earnings and suggests there are times when shareholders are better served if management issues two distinct earnings announcements, one internal to help appraise managerial performance and influence their compensation, and the second external to influence opinions on the corporation's value in the eyes of investors.